Groupon, an Internet coupon company, was founded in Chicago in November 2008 by Andrew Mason, a young entrepreneur who was working with 1 million in seed money provided by Internet entrepreneur Eric Lefkovsky, who was Mason’s former boss. Groupon’s business innovation is merging collective buying with coupons, hence the company’s name: group plus coupon. How does Groupon benefit from changing the way people buy from local merchants? The answer is Groupon collects “half of actual sales, not just profits, in exchange for the introduction to a new customer.”
The Groupon business model is based on “[c]onsumers sign[ing] up to receive offers from local firms by e-mail each day, ranging from restaurant meals to pole-dancing lessons, at discounts of up to 90. But Groupon made virtual coupon-clipping exciting by, first, having offers expire after just a few hours and, second, cancelling them if they do not attract a minimum number of buyers (the ‘group’ in Groupon).” “A certain number of people need to buy into any given deal before it kicks in, or ‘tips’ in Groupon parlance. Once the deal tips—for example, 200 people have purchased a 40 coupon for an 80 massage—the merchant and Groupon split the revenue roughly 50/50, and a group of customers has an unbeatable bargain.” Given that a minimum number of people need to buy into a coupon deal before it tips, buyers eagerly spread information among family and friends, which in turn increases the number of buyers.his effect is like a snowball rolling rapidly down a steep hill, and it can benefit both Groupon and the merchants in the short-term.
Since its inception in November 2008, Groupon has grown like wildfire. By 2010, Groupon was operating in 150 markets in the United States and 100 markets in Europe, with approximately 35 million registered users. By early June 2011, Groupon reported having 83 million subscribers in 43 countries, including an entry to China in March 2011.
Groupon securely dominates the online coupon market in Chicago, New York and San Francisco, “where its offers are unique and lure consumers into new neighborhoods and experiences,…[t]hat’s less true in second- and third-tier cities…where Groupon relies on merchants to come to it.” Although Groupon is the dominant player in online coupons, “its brand only takes it as far as it offers the best deals from the most sought-after local retailers, restaurants and services—the kind of businesses that used to reside in the Yellow Pages and 10 coupon books.”
A major challenge for Groupon in pursuit of its strategic goal is to retain the merchants beyond the first coupon deal with them. Early reports indicated that as many as one-half of small businesses did not continue to participate in Groupon deals, and the majority of those ceased to participate because the first deal was unprofitable. In attempting to counter this merchant drop-off effect, Groupon hired a customer relationship management agency to track merchant satisfaction; “Groupon says early surveys have shown 95 of businesses say they want to work with the company again.”
Groupon’s success has attracted much attention among the Internet business community. Indeed, in late 2010 Google made a 6 billion buyout offer to Groupon, a sum that was nearly twice as much as Google had previously offered for any acquisition. Mason, however, rejected the buyout offer, a decision that one observer characterized as “frustrating, maddening and inexplicable to most people.” Impressed by Groupon’s meteoric rise, venture capitalists say that Google’s interest in acquiring Groupon is easily explained and understood. “Given the potential for future profitable growth, 6 billion may be just fraction of its ultimate value in the market.” Who wouldn’t want to own a money machine like Groupon?
In early June 2011, Groupon filed paperwork with the United States’ Securities and Exchange Commission (SEC) for an Initial Public Offering (IPO) of stock, with the objective of raising 750 million. Speculation in the days following the IPO filing indicated that the amount of money Groupon could raise might be significantly more than 750 million. Indeed, one observer suggested that Groupon “may leapfrog Google Inc. as the biggest U.S. Internet-related initial public offering ever.” Another reporter said, “Groupon has every incentive to IPO fast, to cash in while its expansion is in overdrive. But investors should take their time assessing whether the company’s explosive growth really will translate to surging profits.” Additionally, The Economist points out that “Groupon’s position is not as unassailable as it appears from its rapid growth and huge market share—more than 60 in America…. To ward off competition…Groupon will be forced to lower the share of revenue it keeps from its deals.” Moreover, an increasingly large chunk of Groupon’s revenue goes to cover marketing costs associated with acquiring new subscribers.
Steve Rosenbush, writing in the Institutional Investor, asserts “Groupon is still in the early stages of its growth…[and] has yet to tap the entire U.S. market, let alone the international market.” However, analysts disagree about the future of the online coupon market, with some believing it has monopoly potential and others believing multiple players will have multiple product variations. Evidence is mounting that the latter view may be more on target. Groupon may become strangled by its own success and exponential growth rate. As indicated by its founder and CEO, Andrew Mason, “Groupon’s inability to handle the businesses banging on its door…has led to the proliferation of clones.” Mason “estimates that there are some 500 [clones]; many have ripped off Groupon down to the company’s bright green signature color and website layout. But only Living Social, which just received a175 million investment from Amazon, has emerged as a genuine competitor. Groupon still maintains about 80market share. Losing to a competitor, perhaps one that doesn’t exist yet, is one way the company could fall.” In a March 2011 statement, Mason opined, “[b]y this time next year, we will either be on our way to becoming one of the great technology brands…or a cool idea by people who were out-executed and out-innovated by others.”
With this mixed evidence, are Groupon’s business prospects rosy or dismal?
Discussion Questions
What are the key decisions that Andrew Mason has made during Groupon’s brief history? How have these decisions influenced Groupon’s evolution as an Internet-based business?
How would you describe the decisions identified in your response to question 1 in terms of programmed and nonprogrammed decision making?
How would you describe these decisions in terms of the rational, bounded rationality, and garbage can models of decision making?
How, if at all, has creativity and intuition played a role in the decisions to found and rapidly expand Groupon?
Suppose you think the market for group-based online coupons has great potential, and you desire to enter the competitive fray. What factors would you consider in deciding whether to become a Groupon competitor?